Pension Withdrawals: Is the 4% Rule Still Relevant?

Evolution of the 4% rule

As you approach retirement, one thing you may be considering is how much you will be able to take from your pension pot each year. Take too much and you could wind up running out of money and have to survive on your state pension alone. However, take too little and you might end up living too inside your means, missing out on luxuries and some of the joys during this stage of your life.

So how do you work out what that sweet spot is? Navigating your own income requirement can be complex enough, but there are other factors at play. Inflation, which eats away at the real value of your pension pot, needs to be accounted for in order to maintain your standard of living. Additionally, your remaining pension may continue to grow depending on how its invested. It can start to feel very complicated very quickly! But with so many people facing the same dilemma, you may not be surprised to know that several rules have been created to tackle this problem. One of the most famous is the 4% rule, which was created by American financial advisor William Bengen.

Before we introduce the rule, it is important to note that a blanket approach is not something we would advise and the right approach for you will depend on your individual circumstances.

Bengen created the 4% rule in the 1990s. It stipulates you should take 4% of your retirement pot during the first year and increase that amount in line with inflation every subsequent year.¹

However, much like the rest of life, the financial landscape has also changed a bit since the 90s! And to this end, Bengen updated his rule. He now states that retirees can withdraw have 4.7% in their first year, while still ensuring their savings last for 30 years.²

While rules of thumb can be very helpful benchmarks, it is worth looking more closely into the withdrawal planning and exploring what the pros and cons of a static rule are, and what other options are available to you. Your planner will also be able to provide you with more details and advise you on what the right approach for you will be. 

Bengen’s 4.7% rule

The basic idea behind Bengen’s rule was to determine a safe amount retirees could withdraw from their pension fund, that would have a cost of living adjustment each year and increase the amount in line with inflation.¹ The updated 4.7% rule is based on a US pension pot that is made up of 55% stocks, 40% bonds and 5% cash (US$).³

Utilising statistical models that analysed how the portfolio would perform in different market dynamics, 4.7% was determined to be a “safe” amount that could be withdrawn and ensure the pension would be able to provide income for the retiree for at least 30 years.¹ By his own admission, Bengen’s rule is somewhat conservative.

Limitations of Bengen’s rule

Before you consider utilising Bengen’s rule for your own pension management and withdrawal strategy, there are some drawbacks that should be considered.

US centric: Bengen’s rule is based on a US pension fund portfolio, made up of US bonds, US dollars and skews to US stocks.³ Performance has differed between the two countries, looking at UK vs US inflation and bond yields demonstrates this:

As such, Bengen’s model may not be as relevant to UK retirees.

Conservative: As you may imagine, in many scenarios Bengen’s rule would lead to people having considerable amounts of money left over. And while you can pass on your pension to your loved ones, the legislation is set to change in April 2027 that would mean pensions would be considered part of your estate liable for inheritance tax (IHT).

Account Fees and Taxes: The rule does not take account of account fees or tax legislation. Managing tax bills is an important part of any financial plan, and this is no different when it comes to pensions. For example, tax-free cash and tax-free withdrawals from ISAs can be critical parts of many people’s plans, and these are not accounted for by Bengen’s rule.

So what else could you consider?

While the 4.7% rule can be a good rule of thumb and could provide a safety measure, an inflation-linked withdrawal strategy is quite rare. Many people receive a degree of inflation protection from their State Pension for example, and in practice, taking a more dynamic approach is often preferred. As you explore your options, talk to your financial planner about what your requirements are. They will be able to advise you on what is the right approach for you.

One thing to be clear when considering any of these strategies is that you do not have to commit to one and assume you are locked into that strategy for the remainder of your retirement. Whilst it might be nice to have a simple, static, rule to follow, the reality of retirement withdrawals is a dynamic, adaptive strategy may suit you better. Situations change and being able to take a flexible view on your retirement withdrawals can be invaluable. Making sure your strategy is personalised to you is the most important thing, and a key part of what your planner can help with.

The ideal pension withdrawal strategy is often much more dynamic than a simple rule. You may wish to take more in the early years than later years. Building some “front loading” into your budget can be a great idea and something your planner can help with. Studies have shown that people often spend more in the first few years of their retirement so accounting for this and any expenses that you may want to make as you enter this new chapter can be an important part of a non-static plan.⁴ This can be helpful to bridge the gap between into taking your state pension or to cover some early expenses you want to make to set yourself up in the next stage of your life. Tuning your withdrawals to reflect your situation at the time and allowing you to adapt to any life events and income sequencing means your strategy is designed to meet your specific needs.

Different strategies will work better for different people. The important point is to work out what is important to you. Working with your financial planner will help you come up with a plan that works for you. Your planner can implement stress testing and modelling of your plan to build confidence in sustainable withdrawal levels. Financial planning is an adaptive process, not a one-time calculation. Conducting annual reviews with your planner allows for your plan to evolve with you. The 4.7% rule might work in all of the simulated models, but optimised for a simulation doesn’t always translate to the optimised for your life. 

 

This article is designed to provide you with information only. It is not designed to provide you with financial advice. Please seek financial advice if you are still unsure about your options. There may be a charge for this. Remember, tax treatment depends on your individual circumstances and may be subject to change in the future. And the value of investments can go down as well as up, and could be worth less than what was paid in. This information is based on our understanding in November 2025. Aberdeen is not responsible for the information, accuracy and views of external sources.